For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

By the time I awoke in Pennsylvania on Monday, January 4, the first day of 2016 trading, Chinese stocks had tumbled by about 7%. When the U.S. stock market opened a few hours later, prices plunged before recovering to register a modestly negative return for the day.

The timing of the turmoil seemed to lend it undue significance. By convention, the new year is a fresh start, a hopeful turning of the page. And yet the stock market charts on my computer screen flashed a gruesome shade of crimson. A harbinger of hard times?

We don’t know, of course, but it would have been easy to concoct frightening scenarios that demanded bold action. It always is. After all, the Chinese economy is decelerating. Vanguard expects global growth to remain “frustratingly fragile” in 2016. A lot could go wrong. But rather than concoct, I reflected on the lessons of my favorite investment hero: the retirement-plan participant.

The worst of times

During the global financial crisis, U.S. stock prices declined by more than 50% from their 2007 peak. Outside the United States, stock prices traced a similar trajectory. The turmoil was too much for some investors.

In 2008, according to data from the Investment Company Institute, investors withdrew a net $229 billion from stock funds. Over the next four years, they withdrew an additional $308 billion. In the five years before the 2008–2009 crisis, by contrast, investors added more than $600 billion to stock mutual funds. Such behavior—buy high, sell low—is hardly a formula for success.

We’ve seen it at Vanguard. Vanguard examined the returns* of IRA investors from 2008 through 2012, a period of stock market and emotional extremes. Those who made changes to their initial asset allocation earned about 1 percentage point per year less than the return that would have been produced by a static mix of index funds consistent with their initial allocations.[1] On the road to retirement, an annual shortfall of 1 percentage point is a heavy toll.

Plan participants to the rescue

But what kind of investor is powerful enough to resist the self-sabotaging impulses provoked by a crisis? Vanguard identified some of these investors in separate research on the returns earned by defined-contribution retirement plan participants from 2005 to 2010.[2] Vanguard looked at three groups:

those who invested in a single target-date fund through the entire period;

those who invested in a managed account—a professionally managed mix of stock and bond funds—through the entire period;

all other participants, with portfolios reflecting a range of portfolios, from extreme allocations to a single asset class to heavy concentrations in company stock.

The average returns for all three groups were similar. The big difference was the range of returns in each group. The returns of the single target-date fund and managed account investors clustered near the average—a little more than 3.90% and 3.65% per year, respectively. Not bad in a period that included the worst financial crisis since the Great Depression. Portfolios in the third group produced an average return of 3.76%, but with a wide range of outcomes. The top 5% of these investors earned more than twice as much as the average return, while the bottom 5% lost money over the five-year period.

I’m not quite sure what to make of the investors in group 3, but those in groups 1 and 2 model heroics that can help us vanquish our emotions. With target-date funds and managed accounts, they lashed themselves to the mast of a long-term investment strategy before the market storms. Their embrace of these pre-commitment devices helped ensure heroic investment behavior through the crisis. They held an asset allocation consistent with these goals. They diversified within and across the financial markets. They maintained a long-term perspective. And because they were Vanguard investors, we can bet that they kept costs low.

It’s an inspiring story. I can’t wait for the movie.

Important information

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

Diversification does not ensure a profit or protect against a loss. All investing is subject to risk, including possible loss of principal.

Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

*Personal rate of return, also known as the internal rate of return, is the rate that would transform an account’s initial balance, plus any cash flows into or out of the portfolio, into the account’s final balance.

Andy Clarke

Andy is a senior investment strategist in Vanguard Investment Strategy Group. Before joining Vanguard in 1997, he worked at Morningstar. During his tenure at Vanguard, Andy wrote "Wealth of Experience," an introduction to investing based on ordinary people's stories about what has—and hasn't—worked as they've tried to meet their financial goals. Andy holds a B.A. from Haverford College and an M.S. from West Chester University. He is a CFA® charterholder.

Comments

Paul D. | January 18, 2016 10:01 am

As I get increasingly older, I can understand the rationale of the investor, who after many years of slowly building their wealth, would want to ‘cash out’ when they are seeing it evaporate before their eyes so to speak. My friends, in the same boat as I, are looking at a greatly shortened ‘recoupment’ period from what it was when we all started. Subequently, there is the thought that “well, we may as well save what we can of what we have, because we don’t have very much time left to rebuild”. I am speaking here of the more senior investor who is in his or her ‘twilight’ years and still has plans for those assets after the lights go out. If it is particularly deep, this correction could last for more years than some of us believe we have left.

Of course, I know that by now, we all should have moved our assets to more safe investments, i.e. less stock, more bonds etc. We all know that cash is not going to grow. We see that bonds seem to have such little return in the curent environment. No one’s crystal ball is clear enough to tell us how long, how deep or far reaching the current mess is going to be. The feeling of having played by the rules, built a well diversified portfolio, stayed the course with those portfolios, and yet still suffer the dissapointment of significant losses at the end of the road is not a good one.

I, myself, will soldier on as I always have, I am most concerned about the cohorts in my age group who have thrown in the towel.

David P. | January 8, 2016 10:08 pm

As of Friday 1/8 we have posted a bad week for the U.S. stock markets. Talking heads on TV seem to blame it on “China”.
Which brings me to wonder,is the market in the U.S. (and those in Germany and the U.K.) being driven by Chinese investors who are having to sell shares (on the U.S. and other Western markets) to raise cash in order to cover margin calls or something similar from the Chinese stock market that they are also invested in?

I also wonder whether the daily movements of the U.S. markets are driven more by individual investors buying and selling (either through mutual fund redemptions and purchases or individual stock trading) or by actions of active mutual fund managers who might be selling stock positions for reasons other than pressure to raise cash to cover redemptions from the funds they manage by the fund shareholders

Rickey R. | January 8, 2016 5:50 pm

Carmon M. | January 8, 2016 2:49 pm

It is heartwarming to learn that Andy Clarke has pointed out my having qualified as a first group investor who invested in a single target-date fund through the entire period, an IRA investor from 2008 through 2012 who stayed on course.

Knowing my own limitations, without my total acceptance, I may currently have a portfolio that is about as good as I can make it. Still, there is always a nagging feeling that were I to accept the cost to enjoy a managed account, my modest portfolio could have benefited greatly. Uncertainty is my cross to bear.

I am watching this current, world event driven market that may extend throughout this election year that adds even more turmoil. Do I take advantage of this buy period since I sit on excess funds in my savings account, or continue to wait? So, my lonely struggle continues.

Donald G. | January 8, 2016 5:04 pm

To: Carmon M. Jan.8, 2016 2:49 p.m.There are many different ways that Vanguard helps its client/owners make money. You shared that you were using a target date fund and you did what you are suppose to do as a committed long-term investor.I would put myself in the third group and I am managing my own portifolio. You were wondering if you should invest savings in this volitale and down market.As investors we can “what if” all day long about when,how and what amount we should invest in the market. I personally never leave the market.I buy the whole market using super cheap index funds.I am perfectly satisfied getting what the market makes for me. I could care less and never try and “beat the market”.Each year to two years I look at what my funds have done(facts). If five have made money I sell those and use that money to buy back any funds that have gone down.I have been buying low and selling high for five years now with Vanguard and i am making money.This is something every investor has to do to be successful.As Mr. Clarke pointed out you do NOT panic and sell after the correction and then try and time the rebound to get back in and buy more stocks.No one on the face of the globe knows what the market is going to do -in ADVANCE. History has shown us that after every market calamity,Wars,hurricaines,9-11,the Greek crisis, oil embargo’s etc.,etc, the market has always rewarded the long term investor that stayed the course.Good Luck to your investing mam.

Joe R. | January 18, 2016 5:24 pm

Eric S. | January 8, 2016 1:17 pm

I would take issue with your labeling of Group 2 as a hero. I think there are a lot of bad managers out there or at least managers with a conflict of interest. Perhaps you were only referring to Vanguard accounts that were managed by a Vanguard manager. I wouldn’t know anything about their performance history or compensation structure. But to suggest that one should trust blindly trust management of their money and they’ll do fine, is in my opinion misleading. That’s what I personally searched for in vain for many years before realizing that doing my own research and managing my own money was the best.

However, I believe your overall point is to have a plan and stick with it for the long haul is the right one.

Fair point, Eric. You’re right, due diligence is critical. We need to be sure that our managers are ethical and competent and that they put the client’s interest first. I’m confident that such was the case for the investors in group 2. That wasn’t necessarily clear from my post, however, and your comment makes clear that my statement was too broad. Thanks for the note.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.